You probably remember the Tax Cuts and Jobs Act, or TCJA, introduced and signed nearly a year ago, but if you don’t recall it’s because the new changes haven’t yet come into play. But when it’s time to file your 2018 income taxes next year, there are several changes that will impact your taxes, particularly homeowner tax credits. The mortgage interest deduction is one of the few remaining tax deductions you can still take, but also one of the most popular. There are some changes to this and several other homeowner tax credits in 2018.
Tax Reform and Homeowner Tax Credits in 2018
Lower Limits on Mortgage Interest Deductions
There is a new ceiling on the principal balance on which you can deduct interest. Prior to the TCJA mortgage interest could be deducted on loan amounts up to $1 million, but the new limit has been reduced to $750,000. For those with existing mortgages, the $1 million cap stays in place. This reduction however really doesn’t affect most homeowners in the United States as the median home value across the country hovers near $240,000. These figures are for those who are married and filing jointly. If married and filing separately, the new limit is $500,000, not $750,000.
Lower Limits on SALT Deductions
Another change to homeowner tax credits in 2018 refers to the ability to deduct state, local and property taxes from taxable income, or SALT deductions. When filing taxes next year for 2018, for the first time there will be limits placed on this deduction to $10,000. In higher-taxed states and where property values are above the national median, this too will have an impact but again primarily to higher income earners.
Second Lien Mortgages
There are also changes for second lien mortgages. A second lien can come in different forms. A second lien can be a purchase money loan used to help avoid paying private mortgage insurance when the buyers choose to make a down payment of less than 20% of the sales price of the home. A second lien can also be taken out after the purchase to be used for home improvements, paying for college, or mostly anything the homeowner chooses to spend the money on. Leading up to 2017, interest on second mortgages was also deductible but there are new rules for 2018.
A third form of a second lien is a home equity line of credit, or HELOC, and this is where the greatest impact lies for second lien interest deductions. A HELOC is a revolving line of credit with the home being used as the collateral. In order for interest on a HELOC for 2018 to be deductible, the funds must be used to substantially improve the property, otherwise the deduction is no longer available.
Other Tax Reform Changes
The TJCA covered much more than just the mortgage interest deduction and homeowner tax credits in 2018. One of the most obvious changes was the expansion of the standard deduction, which each married couple or single taxpayer can claim. However, the elimination of the personal exemption—which would normally reduce taxable income by $4,050 for each person, their spouse, and each child—means this won’t be as helpful for most families. Other important tax reform changes include:
• Higher standard deduction to $12,000 for single filers and $24,000 for joint filers
• Personal exemption of $4,050 eliminated entirely
• Income tax rates reduced for most filers
• Child tax credit boosted
• More medical expenses deductible on itemized returns (for 2017 and 2018 tax year only)
There are many other changes as well, but these are the most common. One final word is to remind everyone that all income tax situations are different and you should consult with a tax professional for any tax advice.
If you’re a homeowner or you’re soon to be from 2018 and going forward, the mortgage interest deduction is still there, just in a different form. To see how the changes to homeowner tax credits will affect your taxes in 2018, review your property taxes, state and local taxes, income, exemptions, and tax brackets carefully.
You can find out approximately how much your federal income tax refund will be by using the Mortgage Tax Deduction Calculator. Just another free service provided by Homesite Mortgage!
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